Wednesday, August 12, 2009

China's Not Messing Around On Tires

Believe it or not, a Presidential decision on Chinese tires pursuant to a little-used, and even-lesser-known, provision of US law could prove to be 2009's biggest indicator of the future of US trade policy. The decision comes under "Section 421" (China-specific safeguards) of US Trade Law, and unlike with pending FTAs or "Buy American" or Mexican Trucks, Obama can't dodge or delay the issue because he's statutorily bound to decide by mid-September.

My former Cato colleague and co-authorDan Ikenson did a great quick analysis when the case first started, and will be coming out with a full report on this issue anyday now. In the meantime, here's a (relatively) quick look at the issue as I see it.

The Obama administration is considering imposing tariffs on some Chinese-made tires that could effectively ban them from the United States, a proposal that is shaping up to be the first major test trial of the White House's trade policy toward China.

The case stems from a petition filed by the United Steelworkers, who blame surging Chinese tire imports for the loss of more than 5,000 U.S. jobs since 2004.

In a hearing scheduled for Friday [August 7], the Office of the U.S. Trade Representative will consider whether to endorse a recommendation by the International Trade Commission to impose tariffs of as much as 55 percent on Chinese-made tires for passenger vehicles and light trucks that are sold by independent tire dealers.

The trade commission is a quasi-judicial federal agency that provides trade policy advice to the legislative and executive branches of government. It recommended that the tariffs be imposed for three years. It is up to the president to decide whether to follow that recommendation, ignore it, or craft his own remedy.

The president must decide by Sept. 17, a week before he is scheduled to host Chinese President Hu Jintao in Pittsburgh at a gathering of leaders from the group of 20 industrialized and developing nations.

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If Obama backs the tariff, he risks upsetting the Chinese at a time when the United States needs China to keep buying U.S. government debt to fund stimulus efforts.

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If Obama rejects the tariff, he could alienate labor unions and in particular the steel workers' union, which campaigned heavily for him during his 2008 presidential bid.

The tire case was brought under Section 421 of the Trade Act of 1974, which lets the government determine whether a product from China is being imported in such increased quantities that it causes "market disruption" to the domestic producers of similar or directly competitive items. It became law in 2000 after China agreed to the provision while negotiating to join the World Trade Organization. At least five petitions have since been filed under Section 421, and none earned the support of President George W. Bush.

In its investigation of the tire petition, the International Trade Commission found that between 2004 and the end of 2008, imports of passenger vehicle tires from China increased 215 percent by volume, while production by the U.S. tire industry fell 26.6 percent, net sales were down 28.1 percent, and more than 5,000 domestic jobs were lost.

Chinese tire producers and suppliers were in Washington this week to try to persuade the White House to reject the tariff hike, calling them a form of protectionism that would put 100,000 Chinese out of work without creating jobs in the United States.

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United Steelworkers President Leo Gerard said that imposing tariffs for violating a law that the Chinese agreed to abide by is not protectionism. He also said that higher tariffs would encourage domestic tire production because other countries with low-cost labor don't have the capacity to ramp up production to make up for the drop in Chinese imports.

U.S. tire makers have not taken a position on the union's petition.

Chinese tire makers and suppliers have found allies in U.S. tire distributors and retailers who say tariffs would raise prices, hurting cash-strapped consumers. The Consuming Industries Trade Action Coalition, a group representing manufacturers and distributors, has also objected to the proposed tariff. It fears that if Obama supports tariffs on Chinese tires, it could set off an avalanche of Section 421 filings that would lead to trade wars and harm global trade.

Gerard's blatant falsehoods aside (the case has nothing to do with "violating" US law - it's about stemming a surge of lawfully-traded Chinese imports), the Post story does a decent job teeing up the issue and the basic politics, but it fails to emphasize a few really important points:

Knock out imports of tires from China, and other suppliers in places like Canada, Japan, Korea, Indonesia, Brazil, Mexico, Poland, and Indonesia will be more than happy to grab the business. That's not just logic, but lessons learned from observing the consequences of how high tariffs and restrictive quotas divert trade.

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Even the ITC's majority report on the matter cites the public record created by US tire makers, who have made no secret they see their future profits based upon moving their lower-end operations offshore, while focusing instead on making higher-priced premium tires in the USA.

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While the UAW has expressed solidarity with its brother steelworkers, Ford, Chrysler and General Motors say that they could be hurt if the Obama administration drives up the price of tires. There also seems to be a valid safety issue, as poorer American consumers who would face higher prices for tires that should be replaced would be given an incentive to delay the purchases. The ITC report acknowledges that tire purchases have fallen in the current recession.

And speaking of consumers, economist Tom Prusa estimates that high tariffs on Chinese tires could raise costs for Americans who buy tires by $600-700 million each year. Meanwhile, you've seen the headlines about how the Obama administration hopes consumer spending will increase, thus helping the US climb out of the current deep recession. So, apart from politics, why should the president be considering doing anything to slow down consumer spending? And of course there is the question about the adverse job impact upon those 200,000 Americans who work in the downstream US tire industry.

In other words, the domestic benefit will be negligible, while the costs will be large. (Seealso this great op-ed on the issue.)

2) The reason an affirmative 421 decision could set off an "avalanche" of new cases is because it's relatively cheap and easy to bring and "win" 421 cases, compared to other forms of "trade remedy" actions. The Post article hints at several reasons for this. First, unlike anti-dumping or CVD cases, Section 421 cases don't involve allegations of unfair trade or an independent determination of dumping/subsidization by the Department of Commerce. This makes them cheaper and faster (only about 6 months, compared to a year or more) than AD/CVD cases. Second, unlike "normal" safeguards cases ("Section 201" actions) that have a "serious injury" threshold, 421's standard of "market disruption" is lower and thus easier for petitioners to prove. Third, normal safeguards cases by law must apply to all importing countries, while 421 only targets China - thus it's politically easier to demagogue the issue, and (non-China) foreign resistance is minimal. Given these facts, the President's discretion in 421 cases is the biggest impediment to a "successful" result for petitioners. Bush opposed any protection in all four ITC affirmative 421 decisions, causing domestics to just stop trying. But if Obama sides with the USW, it's game on for the unions, and they don't even need industry support. (And simply the filing of a few more petitions will affect tradeflows as the Chinese pull back.)

3) Given points 1 & 2, the Chinese are very, very serious about this decision, and they're not going to take it lying down. Shortly after the 421 case was announced, China's Commerce Minister Chen Deming wrote in the Wall Street Journal Asia called the 421 case a "regrettable" one that "will seriously test China-U.S. economic and trade relations." For China, this was a very unusual, although still pretty subtle, public warning to President Obama.

But it was nothing compared to yesterday's statements from Deputy Commerce Minister Fu Ziying, according to the AP:

"I believe the case is neither supported by facts nor does it have valid legal grounds," ....

"It is against basic WTO principles and looks like trade protectionism," Fu said. "We hope the U.S. government will refrain from taking action, for the long-term healthy and stable development of U.S.-Chinese relations."

If Deming's statements, the Chinese Tire Industry's lobbying, and Ziying's bold allegations don't get the President's attention, nothing will. This has the all the makings of a serious bilateral conflict.

So mark your calendars, folks. On September 17, we're going to learn a lot about President Obama's views on US trade policy. And on September 18, we might be in the middle of a good ol' fashioned trade war with China, just so Obama could toss a bone to his USW buddies.

Let's hope the cooler, and less political, heads at the White House prevail.